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I'm delighted that Juta Law ‪Tax‬ Administration 2nd edition

is now a prescribed text

 for Unisa's College of Accounting Masters students 

I'd like to thank my clients, my empoyer ENSafrica, 

my colleagues and professional associates, 

and my family and friends for the overwhelming support 

and encouragement during my recent illness. 

I have returned to work part-time and

look forward to soon being back at full strength.

Social Media and Blog posts should return to normal from July 2016

***

Review of Tax Administration Second Edition (Juta Law, 2015)

Below is the first review of Tax Administration Second Edition:

Amendments to the definition of relevant material for purposes of the Tax Administration Act

Introduction

The Minister of Finance tabled the Tax Administration Laws Amendment Bill No. 14 of 2014 in Parliament on 22 October 2014 at the same time that he introduced the 2014 Medium Term Budget Policy statement. The Bill as introduced by the Minister of Finance, also contained the memorandum on the objects of the Tax Administration Laws Amendment Bill of 2014. 

This article will consider certain of the amendments proposed to the Tax Administration Act No. 28 of 2011 which will take effect once the Bill is enacted.

Amendment of section 45 of the Value-Added Tax Act No. 89 of 1991

Clause 32 of the Tax Administration Laws Amendment Bill (‘TALAB’) proposes amending section 45 of the Value-Added Tax Act (‘VAT Act’), which regulates the payment of interest to a vendor, where SARS delays a refund payable to the vendor.

It is important to note that it was previously proposed by way of section 271, read with paragraph 134 of schedule 1 to the Tax Administration Act No. 28 of 2011 (‘TAA’) that with effect from a date to be determined by the President by proclamation in the Gazette that a delayed refund would not be payable if a person fails to, without just cause, submit relevant material requested by SARS for purposes of verification, inspection or audit of a refund in accordance with chapter 5 of the TAA. 

In addition, the provision applied where a taxpayer failed to furnish SARS in writing with particulars of the account required in terms of section 44(3)(d) of the VAT Act to enable SARS to transfer a refund to that account. The date on which the proposed amendment was to take effect was not determined as it related to interest which was dealt with in Government Gazette 35687 published on 14 September 2012.

Clause 32 of the TALAB now removes the reference to where a taxpayer fails to submit relevant material requested by SARS for purpose of verification, inspection or audit of a refund in accordance with chapter 5 of the TAA. Thus, the fact that a taxpayer fails to submit the necessary material to SARS will not prevent the payment of interest to the taxpayer once the refund is finalised and paid to the taxpayer. 

The requirement to furnish SARS in writing with particulars of the account required in terms of section 44(3)(d) of the VAT Act to enable SARS to transfer a refund to that account remains in place. Thus, where a taxpayer fails to comply with that requirement, no interest will accrue on the amount refundable from the date that the refund is authorised until the date that the person submits the bank account particulars. 

The proposed amendments will take effect on the date on which the TALAB is promulgated. The Explanatory Memorandum on this particular provision contained in the TALAB indicates that in practice it has proven factually difficult and impractical for SARS to apply the rules set out in the proposed amendment.

Clause 37 of the Tax Administration Laws Amendment Bill

Clause 37(b) of the TALAB proposes that the definition of “relevant material” in section 1 of the TAA will in future provide as follows:

“means any information, document or thing that in the opinion of SARS is foreseeably relevant for the administration of a tax Act as referred to in section 3”

Previously, the definition of “relevant material” did not refer to “in the opinion of SARS”. The rationale for the above amendment as set out in the Explanatory Memorandum on the Objects of the TALAB is to prevent protracted disputes about the information which SARS believes it is entitled to under the information gathering powers contained in the TAA.

The Explanatory Memorandum points out that the proposed amendment seeks to clarify that the statutory duty to determine the relevance of any information, document or thing for the purposes of, for example, a verification or audit is that of SARS and the term “foreseeable relevance” does not imply that taxpayers may unilaterally decide relevance and refuse to provide access thereto. SARS indicates that in practice taxpayers are deciding what information should be submitted to SARS and what information should not be so provided.

In addition, the Explanatory Memorandum indicates that according to the literature, which is not cited in the Explanatory Memorandum, the test of what is foreseeably relevant for domestic tax application would have a low threshold and the application of what is “foreseeably relevant” follows the following broad principles:

·         Whether at the time of the request there is a reasonable possibility that the material is relevant to the purpose sought;

·         Whether the required material, once provided, actually proves to be relevant is immaterial;

·         An information request may not be declined in cases where a definite determination of relevance of the material to an ongoing audit or investigation can only be made following receipt of the material;

·        There need not be a clear and certain connection between the material and the purpose, but a rational possibility that the material will be relevant to the purpose; and

·         The approach is to order production first and to allow a definite determination to occur later.

The Explanatory Memorandum points out that the protection of taxpayer information received by SARS is confidential and protected under chapter 6 of the TAA and may only be disclosed to another party in certain specific circumstances referred to in chapter 6 of the TAA.

The Explanatory Memorandum indicates that SARS received comments that SARS should provide reasons for each request for information, explaining why the material requested is considered relevant. SARS indicates that this is impractical when auditing taxpayers and referred to the case of Australia and New Zealand Banking Group Limited v Konza, [2012] FCA 196, which SARS relies on as a basis not to justify why material requested is in fact relevant. It is unfortunate that SARS does not draw attention to the fact that Australia does not have a Bill of Rights enshrined in a constitution as is the case in South Africa where the right to administrative justice set out in section 33 of the Constitution of the Republic of South Africa is paramount.

SARS indicates that where a taxpayer is dissatisfied in the manner in which SARS requests information, taxpayers have the following remedies:

·         Request SARS to withdraw or amend the decision to request material in terms of section 9 of the TAA;

·         Pursue the internal administrative complaints resolution process of SARS;

·         Approach the Tax Ombud;

·         Approach the Public Protector.

SARS refers to the internal administrative complaints resolution process of SARS and it is unfortunate that these have not been clarified and publicised on SARS’ website. It is questionable whether the particular issue falls within the mandate of the Tax Ombud as set out in the TAA.

Section 17 of the TAA sets out the limitations placed on the Tax Ombud’s authority and the Tax Ombud may not review SARS’ policy or practice generally prevailing other than to the extent that it relates to a service matter or procedure or administrative matter arising from the application of the provisions of a tax Act by SARS. It may therefore be possible for a taxpayer to argue that where SARS exceeds its powers enshrined in the TAA in requesting information which is clearly irrelevant, that a taxpayer may be entitled to file a complaint with the office of the Tax Ombud.

Where SARS chooses to undertake a field audit at the taxpayer’s premises in terms of section 48 of the TAA, it is important that the material requested falls within the scope of the audit as required under section 48 of the TAA. Section 48(2) requires that SARS issues a notice to a taxpayer indicating the initial basis and scope of the audit or investigation and this should, restrict the scope of information requested and should not entitle SARS to call for all documents and records pertaining to the taxpayer which bears no relationship to the scope of the audit underway.

Taxpayers must remember that under the provisions of the common law, SARS is not entitled to request information which is protected by legal professional privilege. Generally, where a taxpayer has sought advice from an attorney or an advocate, such advice is protected by the so-called advice privilege and furthermore, where a taxpayer is engaged in litigation the documents relating to that litigation will, depending on the circumstances, also be privileged. Based on the decision of the court in Heiman Maasdorp and Barker v Secretary for Inland Revenue and Another 1968 (4) SA 160 (W), 30 SATC 145 the court upheld the principle that SARS is not entitled to request information which is protected by privilege. 

It is unfortunate that the information gathering powers conferred on SARS in sections 46 to 48 do not deal with the question of documents which may be subject to legal professional privilege, as is the case where SARS conducts a search and seizure operation where specific rules are in place to regulate the treatment of documents which may be subject to legal professional privilege. Section 64 of the TAA regulates the process relating to search and seizure operations but does not unfortunately apply specifically to requests for information or field audits conducted by SARS. 

On many occasions SARS will also request copies of advice and opinions obtained by a taxpayer from a person other than an attorney or an advocate and it is questionable whether such information would constitute relevant material as envisaged in section 1 of the TAA. An opinion is generally an analysis of the law and an interpretation thereof which would in a legal dispute be regarded as inadmissible in court as the court is required to adjudicate on matters of legal interpretation. Taxpayers need to consider SARS request for opinions and make a decision whether SARS is lawfully entitled to call for such opinions.

Amendment to the definition of “return”

Clause 37(c) of the TALAB proposes amending the definition of “return” to provide as follows:

“means a form, declaration, document or other manner of submitting information to SARS that incorporates a self-assessment, is a basis on which an assessment is to be made by SARS or incorporates relevant material required under section 25, 26 or 27 or a provision under a tax Act requiring the submission of a return;”

It is therefore clear that the definition of “return” will be expanded and the Explanatory Memorandum indicates that the amendment seeks to clarify that a return is also an information gathering mechanism to obtain third party information which may not on its own constitute a basis of an assessment but is relied on by SARS to verify the correctness of returns submitted by taxpayers. In addition, the purpose of the amendment is to ensure that SARS obtains information required for purposes of SARS meeting its obligations to exchange information under international tax agreements.

The intended amendment seeks to ensure that the definition of a return is more closely linked to the provisions in the TAA and other tax Acts dealing with returns.

Amendment to section 46 of the TAA

Clause 46 of the TALAB contains a requirement that where SARS requests relevant material under section 46, the taxpayer must submit that relevant material to SARS in the format, which must be reasonably accessible to the taxpayer.

Where, for example, taxpayers possess relevant material in electronic format, they would be obliged to make that version of the material available to SARS once the amendment takes effect. SARS indicates in the Explanatory Memorandum that historically taxpayers would only supply SARS with printouts of the electronic version of the material. Thus, this amendment seeks to ensure that where a taxpayer receives a request for relevant material from SARS in terms of section 46 of the TAA, it must be supplied in the format required by SARS if reasonably accessible to the taxpayer. Where, for example, a taxpayer does not maintain electronic records, it would not be acceptable for SARS to insist that the taxpayer captures manual records electronically to suit SARS purposes. Furthermore, a taxpayer should not be obliged to manipulate date and supply it in the particular format which SARS requires if that is not readily available and accessible to the taxpayer.

Tax compliance status

Clause 64 of the TALAB amends section 256 of the TAA which regulates the process regarding the issue of tax clearance certificates to taxpayers.

SARS is compelled to issue or decline to issue the confirmation of the taxpayer’s compliance status within 21 business days from the date on which the taxpayer’s application is submitted or such longer period as may reasonably be required where a senior SARS official is satisfied that the confirmation of the taxpayer’s tax compliance status may prejudice the efficient and effective collection of revenue.

Furthermore, a  senior SARS official may provide a taxpayer with confirmation of the taxpayer’s compliance status as compliant only where they are satisfied that the taxpayer is registered for tax and does not have any outstanding tax debt, other than a tax debt contemplated in sections 167 or 204, or where a tax debt has been suspended under section 164 or does not exceed the amount referred to in section 169(4). Furthermore, the tax clearance certificate may be denied where a taxpayer has an outstanding return, unless an arrangement acceptable to the SARS official has been made for the submission of the return in question.

Section 256(4) of the TAA will provide that a confirmation of tax compliance status must be issued in the prescribed format and refer to the original date of issue of the tax compliance confirmation to the taxpayer, the name, taxpayer reference number and identity number or company registration number of the taxpayer, the date of the confirmation of the tax compliance status of the taxpayer to an organ of state or a person referred to in section 256(5) of the Act and the confirmation of the tax compliance status of taxpayer as at the date referred to above.

SARS will be entitled, in terms of section 256(5) of the TAA, to confirm a taxpayer’s compliance status as at the date of the request by an organ of state or a person to whom the taxpayer presented the tax compliance status confirmation, despite the provisions protecting confidentiality of taxpayer information in chapter 6 of the TAA.

Section 256(6) of the TAA will provide that SARS will be entitled to alter a taxpayer’s compliance status to non-compliant if the confirmation was issued in error or was obtained on the basis of fraud, misrepresentation or non-disclosure of material facts and SARS has given the taxpayer prior notice thereof and an opportunity to respond to the allegations made of at least 14 days prior to the alteration of their status.

Section 256(7) of the TAA provides that a taxpayer’s tax compliance status will be indicated as non-compliant by SARS for the period commencing on the date that the taxpayer no longer complies with the requirements under section 256(3) of the Act and ending on the date that the taxpayer remedies the non-compliance. The new provisions regulating tax clearance certificates will take effect on the date on which the TALAB is promulgated. The Explanatory Memorandum indicates that the requirements of no outstanding requests for information is removed as a requirement for a tax clearance certificate, but that that will be reviewed during the 2015 legislative cycle. SARS has introduced a new tax clearance system which will cater for sending a letter to taxpayers advising them as to the change in their status from compliant to non-compliant, thereby enabling taxpayers to remedy their non-compliant status.

Conclusion

The amendments proposed to the TAA are significant and taxpayers need to be aware thereof. SARS is clearly concerned that taxpayers may resist its request for relevant material when requesting information under section 46 and indeed when undertaking a field audit at the premises of the taxpayer under section 48 of the Act. Clearly, in the case of a field audit, the law requires that SARS specifies the scope of the audit and it would be untenable for SARS to request information which falls outside of the scope of the audit as prescribed in section 48 of the TAA. It is hoped that certain of the provisions contained in the TAA regulating the request for information and particularly what is envisaged by the term “relevant information” will ultimately be adjudicated by the courts to provide clarity for taxpayers and SARS.

Dr Beric Croome,  Tax Executive, ENSAfrica. This article first appeared in TAX TALK Professional, January/February 2015 edition from The South African Institute of Tax Professionals.

New Tax Disputes Resolution Rules Promulgated

The new rules governing objections and appeals were promulgated under section 103 of the Tax Administration Act No. 28 of 2011 (‘TAA’) in Government Gazette 37819 on 11 July 2014. 

These rules replace the rules which were promulgated under section 107A of the Income Tax Act and for all practical purposes the new rules took effect on 11 July 2014 and will therefore regulate the resolution of tax disputes going forward.

The new rules comprise some 68 rules whereas the old rules comprised some 29 rules. The new rules are very similar to the High Court rules regulating litigation and it is important that taxpayers are aware of the provisions of the rules should they entered into a dispute with the Commissioner: South African Revenue Service (‘SARS’).

The rules contain a number of definitions but one that must not be overlooked is that the term “day” means a business day as defined in section 1 of the TAA which excludes Saturdays, Sundays and public holidays and those days between 16 December of each year and 15 January of the following year. 

The rules define the term “deliver” as meaning to issue, give, send or serve a document to the address specified for such purpose under the rules and includes via eFiling. It is intended therefore that most of the documents required under the rules can be lodged via eFiling.

SARS must come to the party in terms of adhering to the time frames set out in new rules

The rules authorise SARS and the taxpayer to agree to extend the time period set out in the rules when necessary.

Under rule 6 a taxpayer can request reasons prior to lodging an objection and should consider doing so where proper reasons have not been made available at the time that the assessment is issued.  A request for reasons must be made in the prescribed form and manner and specify the address at which the taxpayer will accept delivery of the reasons.

The taxpayer must request reasons within 30 days of the date of assessment and SARS is in turn required to provide those reasons within 45 days.

The period of 45 days may be extended by a maximum of 45 days where exceptional circumstances, complexity of the case, principle or the amount involved justify an extension.

If the SARS official is satisfied that reasons have been supplied previously, the taxpayer is required to be informed thereof within 30 days and SARS must refer specifically to the documents which contain those reasons.

Under Rule 7, a taxpayer is required to deliver their notice of objection within 30 days after receiving reasons or the date of the assessment in question. 

The taxpayer is required to complete the prescribed form and must specify the grounds of objection in detail, that is, that part or specific amount of the disputed assessment to which the taxpayer objects, as well as the grounds of assessment which are disputed. 

At the time of filing the objection the taxpayer is required to submit those documents which have not previously been delivered to SARS in substantiation of the grounds of objection.

SARS may regard the objection as invalid where the requirements contained in rule 7 are not met and is obliged to inform the taxpayer within 30 days thereof.

The taxpayer will then be permitted to submit a new compliant objection within 20 days, this was previously 10 days, following the delivery of the notice of invalidity. 

Unfortunately we are seeing too many cases where SARS regards an objection as invalid on various grounds instead of actually dealing with the merits of the objection and taxpayers need to be aware of this problem.

Once the taxpayer has filed their objection, SARS may call for the submission of substantiating documents which are required to be lodged within 30 days of the request being made.

SARS is required to inform the taxpayer of their decision on the objection within 60 days under Rule 9, this period was previously 90 days. 

The period may be extended by a period of 45 days where SARS requests further information and the period may be extended by a period of 45 days where exceptional circumstances or the complexity of the matter, principle or amount involved justify that extension.

Where the taxpayer receives a notice of disallowance of objection, they are entitled to appeal against that decision under Rule 10 and must deliver the notice of appeal in the prescribed form and manner within 30 days after delivery of the notice of disallowance of the objection.

The taxpayer is required to specify in detail the grounds on which they are appealing, as well as the grounds for disputing the basis of the decision to disallow the objection and to specify a new ground on which the taxpayer is appealing. It is at this stage that the taxpayer is entitled to request that the matter be referred to Alternative Dispute Resolution (‘ADR’). 

It must be noted that the taxpayer may not appeal on a ground that constitutes a new objection against a part or amount of the disputed assessment not objected to under Rule 7.

It is therefore critical that when the taxpayer drafts their objection that they deal with all items in dispute, as the failure to do so at the right time will mean that the taxpayer cannot raise disputes later.

The taxpayer would then have the right to have the matter heard by the Tax Board, where the tax in dispute does not exceed R500,000 and SARS and taxpayer agree that the matter should proceed to the Tax Board, which is less costly and less formal than proceeding to the Tax Court.

The new rules contain a new process whereby a case may be designated as a test case under Rule 12, whereby one case will proceed to the Tax Court and similar cases are stayed until the test case is decided.

Instead of proceeding to the Tax Court, the taxpayer may decide to ask that the matter be referred to ADR and this often does result in the tax dispute being resolved. The processes regarding ADR are governed by Rules 17 to 25 and are largely similar to the rules which were previously in place.

Where the case proceeds to the Tax Court, SARS is required to file a statement containing their grounds of assessment and opposing appeal (Rule 31) within 45 days of the taxpayer filing their notice of appeal or the failure of ADR. 

The statement is required to set out the statement of consolidated grounds of disputed assessment, as well as which facts or legal grounds in the taxpayer’s notice of appeal SARS admits and which are opposed. SARS is not entitled to include a ground which constitutes a novation of the whole or factual legal basis of the disputed assessment, or which requires the issue of a revised assessment.

The taxpayer is then required to deliver their statement of grounds of appeal (Rule 32) within 45 days after delivery of SARS’ statement or after discovery of documents by SARS.

The taxpayer must set out their grounds of appeal and which facts or legal grounds are admitted and those which are opposed. The taxpayer is precluded from including a ground of appeal that constitutes a new ground of objection against a part or amount of the disputed assessment not objected to under Rule 7.

Under Rule 33 SARS may then deliver a reply to the taxpayer’s statement of grounds of appeal. The issues in the appeal are those contained in the Rule 31 and 32 statements. The rules allow for the parties to agree that the statements made under Rule 31, 32 or 33 be amended.

As is the case with civil litigation, the parties are required to make discovery of documents in accordance with Rule 36. Rule 37 regulates the notice of expert witnesses. A pre-trial conference is required to be arranged not later than 60 days before the hearing of the appeal.

Under Rule 39 the taxpayer is required to apply to the Registrar of the Tax Court for a date of hearing of the appeal by the Tax Court within 30 days of delivery of the statement of grounds of appeal or SARS’ reply thereto.

SARS in turn is required to compile a dossier for the Tax Court and submit that at least 30 days before the case is heard by the Tax Court.

Part F of the new rules regulate applications on notice either in terms of the TAA itself or under the rules governing objections and appeals, which would include applications for orders to compel the taxpayer or SARS to comply with the provisions of the rules and related matters. Part G of the new rules contains the transitional arrangements, which in principle provide that the new rules will apply to disputes currently in progress.

The frustration that taxpayers experienced in the past was that SARS often failed to adhere to the time frames contained in the old rules. It must be noted that the new rules seek to shorten the time frame for resolution of tax disputes and it is hoped that SARS will adhere to those periods.

Dr Beric Croome Tax Executive: Edward Nathan Sonnenbergs Inc. This article first appeared in Business Day, Business Law and Tax Review, 8 September 2014. Image purchased from www.iStock.com 

The Supreme Court of Appeal Admonishes the South African Revenue Service

Under the provisions of the Tax Administration Act, the Commissioner: South African Revenue Service (‘SARS’) is entitled to request that a taxpayer submits relevant material that SARS requires in terms of section 46 of the Tax Administration Act No. 28 of 2011 (‘TAA’).

Section 1 of the TAA in turn defines ‘relevant material’ as meaning:

“any information, document or thing that is foreseeably relevant for the administration of a Tax Act as referred to in section 3.”

Section 3 in turn contains an extensive definition of what constitutes the administration of a Tax Act and in essence encompasses information required for purposes of assessing taxpayers for tax purposes.

Under the general provisions of the TAA a taxpayer bears the onus that an amount is not subject to tax or that a deduction claimed is deductible for tax purposes. Section 102 of the TAA, which replaced the erstwhile onus provision contained in section 82 of the Income Tax Act, provides that a taxpayer bears the burden of proving:

·         ‘that an amount, transaction, event or item is exempt or otherwise not taxable;

·         that an amount or item is deductible or may be set-off;

·         the rate of tax applicable to a transaction, event, item or class of taxpayer

·         that an amount qualifies as a reduction of tax payable;

·         that a valuation is correct; or

·         whether a “decision” that is subject to objection under appeal in the Tax Act, is incorrect.’

However, the burden of proving whether an estimate envisaged in section 95 of the TAA deals with estimation of assessments the burden shifts to SARS which is required to show that the estimate is reasonable. 

Furthermore, where SARS imposes an understatement penalty SARS must prove the facts on which it based the understatement penalty levied under chapter 16 of the TAA.

It must be remembered that where a person is charged with a criminal offence, the state has the obligation to prove that the person committed that offence beyond any reasonable doubt, which is a very high threshold. 

Insofar as discharging of the onus under tax legislation is concerned, the taxpayer must show on a balance of probabilities that the facts or assertions made are correct.

When SARS conducts an audit and requires information to satisfy SARS that deductions have been properly claimed, the question often arises as to the extent of documentary evidence that is required to be submitted by a taxpayer to discharge the onus placed upon the taxpayer under the TAA.

In the Supreme Court of Appeal case of The Commissioner for the South African Revenue Service v Pretoria East Motors (Pty) Ltd, case number 291/12 [2014] ZASCA 91 in which judgment was delivered by Ponnan JA on 12 June 2014 clear guidelines were set out as to what constitutes sufficient proof which should be acceptable to SARS in a taxpayer discharging the onus borne by a taxpayer.

In the Pretoria East Motors case the taxpayer carried on business as a car dealership in Pretoria selling new and used vehicles. During June and July 2003 SARS officials conducted a detailed audit of the taxpayer’s affairs covering the period 2000 to 2004.

In concluding the audit SARS issued additional income tax and value-added tax assessments. 

The taxpayer lodged objections against the various assessments and that having been disallowed by SARS it then appealed to the Tax Court in Pretoria.  Both the taxpayer and SARS were dissatisfied with the decision of the Tax Court and the case proceeded to the Supreme Court of Appeal.

The Court pointed out that much of the evidence presented at the Tax Court took the form of documentary exhibits, including documents obtained or prepared by SARS during the course of the audit.

The Court pointed out that the taxpayer’s ipse dixit will not lightly be regarded as decisive. It is necessary that the taxpayer’s ipse dixit is considered together with all of the other evidence of the case. 

The Court made the point that the interests of justice require that the taxpayer’s evidence and questions of its credibility be considered with great care. 

It is required that the taxpayer’s evidence under oath and that of its witnesses must be properly considered by the court and the credibility of the taxpayer’s witnesses must be assessed no different to any other case that comes before a court.

SARS issued additional assessments on the basis of information obtained from the taxpayer’s records and the court indicated that the SARS official, namely Ms Victor, was to examine the taxpayer’s accounts and where she identified a discrepancy that she did not understand be raised in assessment to additional tax either for income tax or VAT or in some cases both. 

The court pointed out that Ms Victor did not seek to familiarise herself with the workings of the taxpayer’s accounting system even though the information was available to her. Certain of the transactions concluded by the taxpayer were purely internal to the taxpayer’s operations and were being reflected as sales on that internal system did not comprise sales in the true sense for fiscal purposes. 

The court pointed out that Ms Victor ignored the internal character of the transactions of the taxpayer and she levied VAT thereon. At paragraph 11 the court stated as follows:

“As best as can be discerned, Ms Victor’s approach was that if she did not understand something she was free to raise an additional assessment and leave it to the taxpayer to prove in due course at the hearing before the Tax Court that she was wrong. Her approach was fallacious. The raising of an additional assessment must be based on proper grounds  for believing that, in the case of VAT, there has been an under declaration of supplies and hence of output tax, or an unjustified deduction of input tax. In the case of income tax it must be based on proper grounds for believing that there is undeclared income or a claim for a deduction or allowance that is unjustified. It is only in this way that SARS can engage the taxpayer in an administratively fair manner, as it is obliged to do. It is also the only basis on which it can, as it must, provide grounds for raising the assessment to which the taxpayer must then respond by demonstrating that the assessment is wrong. This erroneous approach led to an inability on Ms Victor’s part to explain the basis for some of the additional assessments and an inability in some instances to produce the source of some of the figures she had used in making the assessments. In addition, as a matter of routine, all the additional assessments raised by her were subject to penalties a the maximum rate of 200 per cent, absent any explanation as to why the taxpayer’s conduct was said to be dishonest or directed at the evasion of tax.”

It is clear that the Supreme Court of Appeal has held that in auditing a taxpayer the Commissioner is required to properly consider the documentation provided and to understand that information. It is not sufficient for SARS to merely request information and then disregard it and to issue an assessment as it sees fit.

The court made the point that where the SARS auditor issues an assessment based on the taxpayer’s accounts and records but has misconstrued those records then it will be sufficient for the taxpayer to explain the nature of SARS’ misconception, point out the flaws in the analysis and to explain how those records and accounts should be properly understood.

Whilst it is clear from the judgment that the taxpayer did not succeed in all of its challenges to the VAT and tax assessments issued by the Commissioner, the taxpayer did succeed in satisfying the court that SARS had gone too far in reaching the conclusions it did by disregarding information provided to it.

It is clear under the right to administrative justice in section 33 of the Constitution that taxpayers are entitled to fair administrative action and this includes the conduct of SARS officials in concluding an audit into the affairs of the taxpayer. 

The law requires that SARS officials properly evaluate the documentary evidence presented and where taxpayers reach the conclusion that this is not the case they should challenge SARS’ decision or alternatively seek to raise the problem directly with the office of the Tax Ombud which office has been created to deal with abuses of power by SARS and where SARS does not comply with proper procedures in administering the tax laws of South Africa.

SARS, in the case under consideration alleged that insufficient proof had been made available by the taxpayer. 

In fact the taxpayer had offered SARS sight of all of the taxpayer’s ledger accounts and this invitation was declined. It is clear that in the case the SARS auditors had been given access to the documents substantiating the taxpayer’s accounts but chose not to examine them.

Thus, taxpayers who are subject to audit by SARS need to be aware of the rights that they have flowing from the Constitution and also the level and standard by which SARS is required to operate which are enshrined in the Constitution under fiscal laws of the country.

Dr Beric Croome, Tax Executive: Edward Nathan Sonnenbergs Inc.  This article first appeared in Business Day, Business Law and Tax Review, August 2014. Image purchased from www.iStock.com

Receiver Throws Information Net Wider

On 5^th April 2013, the Commissioner: South African Revenue Service issued Government Notice number 260, which appeared in Government Gazette number 36346 on 5^th April 2013, setting out returns of information which must be submitted by third parties in terms of section 26 of the Tax Administration Act, No 28 of 2011. 

It is appropriate to point out that, on 29^th February 2012, the Commissioner: South African Revenue Service published a Government Notice requiring reporting institutions to furnish bi-annual returns of investment and interest with effect from the 2013 year of assessment.  That government notice required certain financial institutions to supply extensive information to the Commissioner: SARS.  As a result of the Tax Administration Act taking effect, it was necessary for a new notice to be published specifying information to be supplied by various third parties to Commissioner: SARS.

Hackles may rise as this move could be seen as a violation of the taxpayer’s right to privacy

At the time that the Tax Administration Act was being finalised, it was indicated that the legislation was being enhanced to improve the gathering of information from third parties by the Commissioner: South African Revenue Service, so as to increase the levels of tax compliance in South Africa and to assist in the further pre-population of tax returns to be submitted by individuals.

The latest notice requires financial institutions to supply details of retirement annuity contributions paid by taxpayers and for medical aid schemes to supply details of contributions made by persons in respect of the medical scheme, as well as all expenses paid for a person by a medical scheme.  

These two particular requirements will assist SARS in pre-populating tax returns to be lodged by individuals.  In addition, financial institutions in receipt of premiums paid for income protection policies must disclose that to the Commissioner, which should assist taxpayers in satisfying the Commissioner: SARS as to the deductibility of premiums paid on income protection policies.

The notice issued on 5^th April 2013 requires the following persons to submit a return in the manner prescribed in the notice:

•          banks regulated by the registrar of banks in terms of the Banks Act or the Mutual Banks Act;
•          co-operative banks regulated by the Co-operative Banks Development Agency in terms of the Co-operatives Banks Act;
• 
  
•          the South African Post Bank Limited, regulated in terms of the South African Post Bank Limited Act;
•          financial institutions regulated by the executive officer, deputy executive officer or board, as defined in the Financial Services Board Act, whether in terms of that Act or any other act;
• 
  
•          companies listed on the JSE and connected persons in relation to the companies that issue bonds, debentures or similar financial instruments;
• 
  
•          state-owned companies, as defined in section 1 of the Companies Act that issue bonds, debentures or similar financial instruments;
• 
  
•          organs of state, as defined in section 239 of the Constitution of the Republic of South Africa that issue bonds, debentures or similar financial instruments;
• 
  
•          any person, including a co-operative, as defined in section 1 of the Income Tax Act, who purchases any livestock, produce, timber, ore, mineral or previous stones from a primary producer other than on a retail basis;
• 
  
•          any medical scheme registered under section 24 of the Medical Schemes Act;
• 
  
•          any person who, for their own account, carries on the business as an estate agent, as defined in the Estate Agency Affairs Act and who pays to or receives on behalf of a third party any amount in respect of any investment, interest or the rental of property; and
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•          any person who, for their own account, practices as an attorney, as defined in section 1 of the Attorneys Act, and who pays to or receives on behalf of a third party any amount in respect of any investment, interest or the rental of property.

The notice then describes the nature of the information to be provided by the categories of persons specified in the notice.  The Commissioner is seeking information regarding amounts paid or received in respect of or by way of any investment, rental of immovable property, interest or royalty, and transactions that are recorded in an account maintained for another person, that is, so-called transactional accounts like bank accounts.

Furthermore, those persons involved in the purchase and disposal of financial instruments for clients are required to disclose details of amounts paid in respect of the purchase and disposal of financial instruments.

Insurance companies are required to report the payment of amounts made upon the death of a person in terms of an insurance policy.

Monies paid in respect of the purchase, sale or shipment of livestock, timber, ore, mineral, precious stones or by way of a bonus, in the case of a co-operative, are required to be disclosed to the Commissioner by affected persons.

The affected third parties are required to submit the requisite IT3 form to the Commissioner, or, alternatively, a data file compiled in accordance with SARS’s business requirements specification for IT3 data submission.

The requirement to submit information to the Commissioner is onerous in that the returns specified in the notice containing all information required in respect of the period from 1 March to 31 August of each tax year must be submitted by 31 October and, in respect of the period from 1 March to the end of February, must be submitted by 31 May.  This increases the administrative burden on the affected persons, and will, no doubt, require amendments to computer systems to facilitate the transfer of data electronically to the Commissioner.

It is indicated that, where the third party return comprises twenty or less detailed records, the declaration portion of the return and detailed portion of the return must be submitted electronically using the SARS e-filing platform, or manually to the SARS office closest to the person’s place of business.

For those larger organisations, and where the third party return comprises twenty-one to fifty thousand detailed records, it is necessary to submit the declaration electronically using SARS’s e-filing platform, and the detailed portion of the return must be submitted electronically, using SARS’ hypertext transfer protocol secure (https) bulk data file platform. 

In the event that the third party return comprises more than fifty thousand detailed records, the declaration portion of the return must be submitted electronically using SARS’ e-filing platform, and the detailed portion of the return must be submitted electronically, using SARS’ managed data transfer platform.

The Government Notice provides that alternative arrangements may be made by affected persons as to how the information should be transferred or made available to SARS.

The Government Notice was issued so as to enable SARS to enhance third party information received by it, to ensure enhanced compliance with the tax laws of South Africa, and, also, to facilitate a greater degree of pre-populating of tax returns issued by SARS for completion by individuals.

Some commentators may seek to argue that the provision of the information called for violates the taxpayer’s right to privacy, but it must be remembered that any right contained in the Constitution is capable of limitation under section 36 of the Constitution of the Republic of South Africa, No 108 of 1996, as amended.  

The request of the information set out in the notice may be construed as a violation of the right to privacy, but it is necessary for SARS to call for such information in order to comply with its obligations in administering the tax laws of South Africa, and, on this basis, the limitation of rights provision contained in section 36 of the Constitution would assist SARS should the information called for be challenged by taxpayers or affected persons.  

■ Dr Beric Croome is a tax executive at ENS.This article first appeared in Business Day, Business Law & Tax Review, June 2013. Free Image from FreeDigitalImages

Forum On Tax Administration – Moscow Meeting

The Forum on Tax Administration (‘FTA’), comprising the heads of tax administrations from 45 economies, met in Moscow for the 8th meeting of the FTA.  The final communiqué issued pursuant to the Moscow meeting indicated that the FTA is dedicated to securing high levels of voluntary tax compliance by providing excellent service and effectively addressing tax evasion and aggressive tax avoidance in all its forms, including the underground economy.

The communiqué indicated that the participating tax administrations are committed to undertaking action jointly to improve the effectiveness of tax administrations, address trans-national tax fraud, tax evasion and aggressive tax avoidance.

The Moscow communiqué pointed out that, where the tax administrations are detecting offshore evasion, they will share information with their partner countries.  It was pointed out that tools have been developed to enhance the gathering of information and cross-border financial transfers, to understand banking transactions and to identify the beneficial owners of complex structures.  Furthermore, Australia, the United Kingdom and the United States of America have secured significant data revealing complex offshore structures, which will be utilised by the revenue authorities in those countries to identify participants in tax evasion and take action against those persons where necessary.  It would appear that the three countries concerned will share the information obtained by them to other members of the FTA in accordance with international agreements.

Over the last few years, the number of agreements allowing for the exchange of information between countries has increased, and this has facilitated the greater flow of tax information between states.  The FTA has indicated that it will rely more and more on the provisions of the increased network of agreements, allowing for the exchange of information and, also, by providing necessary training to tax auditors to ensure the effective and secure use of information received under the various international agreements.  It must be noted that the automatic exchange of information between states has increased, and that this will ultimately become the standard to which various countries will comply under international agreements.

The Moscow communiqué also referred to the OECD’s work on Base Erosion and Profit Shifting (‘BEPS’), which will initiate an action plan intended to modernise international tax instruments and standards to counter BEPS, particularly in the area of international taxation, transfer pricing and the digital economy, in an effective manner.  Governments around the world are concerned about the erosion of their tax base and shifting of profits to lower tax jurisdictions, particularly in the current economic climate, which has created difficulties for tax authorities collecting sufficient tax for the various governments around the world.

In addition, the communiqué indicates that tax administrations must enhance their efficiency and offer their citizens and business quality service and support for voluntary compliance.  It was pointed out that the effective management of tax debts, including tax debts that arise cross-border, is a key priority, and will be a particular focus of attention in the future.

When reference is made to the various initiatives underway, such as the OECD’s BEPS initiative, the work of the FTA and other organisations, it is important that businesses review the manner in which they conduct their tax affairs to ensure that they comply with their fiscal obligations in the various countries within which they operate.

All revenue administrations need also to take account of the rights which taxpayers have in their dealings with the revenue authority, and South African taxpayers can seek reliance on the Constitution of the Republic of South Africa, Act 108 of 1996, in ensuring that their rights are not violated by SARS.  Various organisations have undertaken research into the design of a model taxpayers’ charter to prescribe levels of taxpayers’ rights to protect taxpayers in their dealings with tax administrations around the world.

It is important, taking account of the pressures facing revenue authorities to raise revenue in difficult economic times, that taxpayers’ rights are protected, and are not disregarded when collecting tax that the revenue authorities believe may be due.

This article by Dr Beric Croome first appeared in the May 2013 edition of tax ENSight newsletter.  Free image from ClipArt